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Monetary and fiscal policy interaction and government debt stabilization

Author

Listed:
  • Bovenberg, A.L.

    (Tilburg University, School of Economics and Management)

  • van Aarle, B.
  • Raith, M.

Abstract

In many developing and developed countries, government debt stabilization is an important policy issue. This paper models the strategic interaction between the monetary authorities who control monetization and the fiscal authorities who control primary fiscal deficits. Government debt dynamics are driven by the interest payments on outstanding debt and the part of the primary fiscal deficits that is not monetized. Modelling the interaction as a differential game, we compare the cooperative equilibrium and the non-cooperative Nash open-loop equilibrium. The well-known unpleasant monetarist arithmetic is reinterpreted in this differential game framework. We consider also the effects of making the Central Bank more independent.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Bovenberg, A.L. & van Aarle, B. & Raith, M., 1995. "Monetary and fiscal policy interaction and government debt stabilization," Other publications TiSEM 551a1c00-24f8-4a9e-aec8-b, Tilburg University, School of Economics and Management.
  • Handle: RePEc:tiu:tiutis:551a1c00-24f8-4a9e-aec8-b879cf8198e1
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    References listed on IDEAS

    as
    1. Jensen, Henrik, 1994. "Loss of monetary discretion in a simple dynamic policy game," Journal of Economic Dynamics and Control, Elsevier, vol. 18(3-4), pages 763-779.
    2. Alex Cukierman, 1992. "Central Bank Strategy, Credibility, and Independence: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031981.
    3. Judd, Kenneth L., 1982. "An alternative to steady-state comparisons in perfect foresight models," Economics Letters, Elsevier, vol. 10(1-2), pages 55-59.
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    Citations

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    Cited by:

    1. Engwerda, J.C., 1999. "On the solution set of scalar algebraic Riccati equations," Other publications TiSEM 11c4c9d5-d01b-4372-a18b-1, Tilburg University, School of Economics and Management.
    2. Engwerda, J. C., 1998. "Computational aspects of the open-loop Nash equilibrium in linear quadratic games," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1487-1506, August.
    3. Willi Semmler & Wenlang Zhang, 2004. "Monetary and Fiscal Policy Interactions in the Euro Area," Economic Change and Restructuring, Springer, vol. 31(2), pages 205-227, June.
    4. Pasquale Foresti, 2015. "Monetary and debt-concerned fiscal policies interaction in monetary unions," International Economics and Economic Policy, Springer, vol. 12(4), pages 541-552, October.
    5. Engwerda, J.C., 1998. "On the Scalar Feedback Nash Equilibria in the Infinite Horizon LQ-Game," Discussion Paper 1998-112, Tilburg University, Center for Economic Research.
    6. Damir Šehović, 2013. "General Aspects of Monetary and Fiscal Policy Coordination," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 2(3), pages 5-27.
    7. Kadria, Mohamed & Ben Aissa, Mohamed Safouane, 2016. "Inflation targeting and public deficit in emerging countries: A time varying treatment effect approach," Economic Modelling, Elsevier, vol. 52(PA), pages 108-114.
    8. Engwerda, J.C., 1996. "The Infinite Horizon Open-Loop Nash LQ-Game," Research Memorandum 741, Tilburg University, School of Economics and Management.
    9. Engwerda, Jacob C., 1998. "On the open-loop Nash equilibrium in LQ-games," Journal of Economic Dynamics and Control, Elsevier, vol. 22(5), pages 729-762, May.
    10. Jacob C. Engwerda, "undated". "Computational Aspects of the (In)finite Planning Horizon Open-loop Nash Equilibrium in LQ-Games," Computing in Economics and Finance 1996 _018, Society for Computational Economics.
    11. van den Broek, W.A., 1999. "Moving Horizon Control in Dynamic Games," Discussion Paper 1999-07, Tilburg University, Center for Economic Research.
    12. van den Broek, W. A., 2002. "Moving horizon control in dynamic games," Journal of Economic Dynamics and Control, Elsevier, vol. 26(6), pages 937-961, June.
    13. W. A. van den Broek, 1999. "Moving-Horizon Control in Dynamic Games," Computing in Economics and Finance 1999 122, Society for Computational Economics.
    14. repec:eut:journl:v:20:y:2016:i:2:p:225 is not listed on IDEAS
    15. Engwerda, J.C., 2006. "Linear Quadratic Games : An Overview," Discussion Paper 2006-110, Tilburg University, Center for Economic Research.
    16. Valeria De Bonis & Pompeo Della Posta, 2005. "Strategic interactions between monetary and fiscal authorities in a monetary union," Working Papers de Economia (Economics Working Papers) 26, Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro.
    17. Jacob Engwerda & Davoud Mahmoudinia & Rahim Dalali Isfahani, 2016. "Government and Central Bank Interaction under Uncertainty: A Differential Games Approach," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 20(2), pages 225-259, Spring.
    18. repec:kap:pubcho:v:177:y:2018:i:3:d:10.1007_s11127-018-0584-7 is not listed on IDEAS
    19. Engwerda, J.C., 2007. "Multicriteria Dynamic Optimization Problems and Cooperative Dynamic Games," Discussion Paper 2007-41, Tilburg University, Center for Economic Research.
    20. Richard C. K. Burdekin & Leroy O. Laney, 2016. "Fiscal policymaking and the central bank institutional constraint Una Vez Más: New Latin American evidence," Public Choice, Springer, vol. 167(3), pages 277-289, June.
    21. repec:spr:joptap:v:104:y:2000:i:1:d:10.1023_a:1004693109541 is not listed on IDEAS
    22. Séverine Menguy, 2013. "Inflationary Consequences of the Indebtedness Levels of the Member Countries in a Monetary Union," The Journal of European Theoretical and Applied Studies, The Center for European Studies at Kirklareli University - Turkey, vol. 1(1), pages 87-111.
    23. repec:cbk:journl:v:2:y:2013:i:2:p:5-27 is not listed on IDEAS

    More about this item

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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